Company Decisions in the Midstream Space: To Divest or Not to Divest?

In any industry, it’s crucial for companies to know when to part with an asset or a business. However, selectivity in divestments is important, too.

After years of feasting on low interest rates and favorable energy prices, midstream operators, including those residing in the ALPS Alerian MLP ETF (NYSEArca: AMLP), are renewing their devotion to balance sheet fortitude and are selectively shopping for assets to that effect.

“As the midstream/MLP space increasingly shifts to disciplined capital spending focused on free cash flow and sustainable returns, midstream MLPs and corporations are selectively rationalizing their asset portfolios through divestitures to help achieve their strategic objectives,” writes Alerian analyst Mauricio Samaniego. “For some names, the intent has been to take advantage of a favorable energy environment to increase financial flexibility and minimize risks by exiting non-core activities or business ventures.”

AMLP 1 Year Performance

AMLP Specifics

Earlier this month, Crestwood Equity Partners (CEQP) and utility Consolidated Edison (ED) sold the Stagecoach Gas Services to Kinder Morgan (KMI) for $1.225 billion. Crestwood is a member of the AMLP roster at a weight of 3.62%. That price tags represents 11x estimated 2021 earnings before interest, taxes, depreciation, and amortization (EBITDA), suggesting the AMLP holding struck a good deal.

“For context, at the end of May, the equally-weighted average EV/EBITDA multiples for the Pipeline Transportation ǀ Natural Gas sector of the Alerian MLP Infrastructure Index (AMZI) and Alerian Midstream Energy Select Index (AMEI) represented 8.8x and 10.2x multiple to 2022 EBITDA, respectively,” adds Samaniego.

The sale is relevant to AMLP investors because Crestwood intends to use proceeds from the transaction to continue firming its balance sheet, while perhaps buying back shares.

Other AMLP holdings that have recently announced asset sales include Plains All American Pipeline (PAA) and Magellan Midstream Partners (MMP). Those companies combine for nearly 21% of the fund’s roster. Plains All American has been a dedicated seller dating back to 2016, unloading assets with a combined value of $4.5 billion.

“Midstream MLPs and corporations are leveraging a favorable energy environment and increased private equity interest to pursue asset sales with the goal of improving financial flexibility, enhancing shareholder returns, and optimizing asset portfolios to maximize value to shareholders,” added Samaniego.

Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.